Cisco: A confident, combative Chambers

But analyst warns that 2014 is ‘moment of truth’ for tech powerhouse

SAN FRANCISCO (MarketWatch) — Cisco Systems shares rallied Thursday after the tech giant surprised Wall Street with a strong report that was punctuated by combative, confident remarks from Chief Executive John Chambers.

Cisco
CSCO, +0.42%
climbed 8% to $24.63, bucking a broad market retreat, and emerging as the best performer on the Dow Jones Industrial Average. The Dow
DJIA, -0.32%
was last down 144 points, while the Nasdaq Composite Index
COMP, -0.01%
was off 45 points.

Late Wednesday, Chambers kicked off his remarks on the conference call with analysts by quickly turning to the outlook, which was stronger-than-expected, and painting an upbeat picture of Cisco’s near-term future, one that includes outpacing rivals.

“I’m usually pretty realistic where our competitors are, even though we know how we’re going to beat them,” Chambers told analysts on Wednesday earnings call.

On how Cisco has won back customers from rivals with a new networking product, he said, “The receptivity’s been extremely strong. ... You might have seen a small startup and VMWare
VMW, +0.70%
combine because they’ve been out there for five plus years. We’re taking almost all of those back. Momentum feels very good on it and I think you’ll just see us knock them off one after the other.”

Chambers was equally upbeat in the server market where it’s been challenging incumbents like Hewlett-Packard
HPQ, -0.33%
and Dell.

“In terms of ... our competition, IBM
IBM, +0.64%
and HP and Dell, I feel very comfortable with us continuing to beat them pretty well,” he said.

Chambers did point to challenges ahead, including the ongoing uncertainty in emerging markets. But analysts noted that Cisco may have regained some of the momentum it lost recently, though it’s unclear for how long.

“As we edge toward the second half of 2014, the comparisons get exceptionally easy after the drubbing last year,” Needham analyst Alex Henderson told clients in a note. “Cisco is likely to ratchet up and establish a bit better share price trajectory. We remain at hold but are encouraged.”

“We like owning Cisco when orders are accelerating, and it happened in fiscal third quarter,” he told clients in a note. “However, we are not reading a whole lot more into the quarter. Orders should continue to accelerate for the next 2-3 quarters, helped by the comps and new product roll-outs, but may hit a wall in fiscal third quarter 2015 when [comparing] to the just reported quarter.”

One area where Cisco’s report has sparked some discussion is software-defined networking. That’s the trend in corporate IT in which businesses are able to rely less heavily on hardware by using software to operate their networks and data centers.

Analysts point to SDN, as it is referred to, as one of the most serious threats to Cisco, which became a tech powerhouse by selling the hardware, known as the plumbing, that run IT networks.

But Cisco has been fighting to establish a position in this trend, and Wednesday’s report has made some analysts think it’s succeeding, though the long-term picture remains blurry.

“Cisco seems to be benefiting from SDN in the near term, but the competitive landscape is set to become much more difficult over a 12+ month time frame,” Genovese said.

ISI Group’s Brian Marshall also said new networking technologies remain a major long-term hurdle for Cisco, as he maintained a neutral rating despite the company’s upbeat report.

“Our discussions with customers and vendors suggest uncertainty over future networking architectures has caused many enterprises to stretch out replacement cycles as they evaluate choices and wait for new solutions to mature,” he told clients in a note.

He added: “This is potentially the largest headwind Cisco is facing and 2014 is a “year of truth” in which many customers decide whether to stick with Cisco’s vision or more seriously explore alternatives.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.